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Iran’s oil market realities: How India, others are preparing for US sanctions

The US says it will persuade countries which currently buy Iranian oil to cut imports by as much as 1 million barrels a day when the sanctions take effect in early November.

Bloomberg | Aug 16, 2018, 13:18 IST

Highlights

India is said to be mulling a 50 per cent cut in its oil imports from Iran to secure a waiver from the US

US says it will persuade countries which currently buy Iranian oil to cut imports by as much as 1 million barrels a day when the sanctions take effect in early November

NEW DELHI: In November, US sanctions on Iran are due to enter into force that could drive down the Persian Gulf nation’s exports and upend the global oil market. There are already signs that it will be harder for the country to export, as some international insurers stop covering shipments.

The US measures require buyers to cut purchases or run the risk of their banks being excluded from the American financial system. If they do scale back, then there’s a risk of spiraling crude prices.

President Donald Trump’s national security adviser, John Bolton, says waivers from sanctions on buying Iranian oil will be “few and far between”. The US says it will persuade countries which currently buy Iranian oil to cut imports by as much as 1 million barrels a day when the sanctions take effect in early November. While this would be a significant reduction in Iran’s crude sales, it is far less severe than the Trump administration’s previously stated aim of halting all sales of Iranian crude.

Meanwhile, Iran’s Foreign Minister Mohammad Javad Zarif says European countries, which are party to the Iran nuclear deal, have held talks separately with other countries to lobby them to continue buying Iranian oil. But the looming threat of sanctions has already started to have an impact on Iran’s oil business. The Islamic republic’s crude outflows have fallen and it is having to rely more on its own fleet of tankers to carry oil to its customers, according to ship-tracking data compiled by Bloomberg. Iran has responded by lowering the sales price for its light crude for delivery in September to the cheapest level in 14 years.

A summary of the main Iranian oil importers’ reactions and positions is set out below. Observed flows and exports are from tanker tracking data compiled by Bloomberg. To calculate what that equates to as a share of each country’s overall purchases, import data from the Riyadh-based Joint Organisations Data Initiative were used.

INDIA

Observed flows (January-June): 597,000 barrels per day (bpd)

Share of observed exports (January-June): 23 per cent

Share of imports (November-April): 11 per cent

What government has said: The country is currently said to be mulling a 50 per cent cut in its oil imports from the Islamic republic to secure a waiver from the US to continue buying crude from the Islamic Republic. But in the first two weeks of August observed Iranian crude shipments to India fell by 95 per cent, compared to the same period in July, according to ship-tracking data compiled by Bloomberg.

What companies have said: Indian Oil Corp. Chairman Sanjiv Singh said in July that Saudi Arabia alone can cover most of the world’s supply shortfall if Iran’s oil exports dry up. “We have Plan B, Plan C, Plan D. We are fully prepared,” he said. IOC and Bharat Petroleum Corp. kept buying Iranian crude in July and have contracted oil from the Persian Gulf country for August deliveries. Hindustan Petroleum Corp., the third biggest state refiner, is unlikely to buy any more Iranian oil until India gets a waiver from the US, since its new insurance cover for its refineries would be invalidated by processing Iranian oil, according to a person familiar with the matter.

Mangalore Refinery and Petrochemicals Ltd. said in its annual report that it’s looking at alternative sources like Australia, West Africa and South America to supplement any reduction from the Persian Gulf nation, which supplied a quarter of its oil needs. Shipping data compiled by Bloomberg show Reliance Industries Ltd., India’s largest petrochemical firm, cut Iranian oil imports in June, although month-on-month flows are prone to big swings.

CHINA

Observed flows (January-June): 675,000 bpd

Share of observed exports (January-June): 26 per cent

Share of imports (December-May): 7 per cent

What government has said: While Beijing has agreed to not ramp up purchases from Iran, China has rejected a US request to cut them, according to two officials familiar with negotiations. China will continue to cooperate with Iran without violating international obligations, foreign ministry spokeswoman Hua Chunying said back in June. In July, China continued to pay for Iranian crude imports in yuan.

The sanctions have also presented China with an opportunity to take the lead in a project to develop Iran’s biggest gas deposit after France’s Total SA had to halt its operations there. State-owned China National Petroleum Corp. is now expected to take the lead on the $5 billion project to develop the South Pars Gas field.

What companies have said: Nothing.

SOUTH KOREA

Observed flows (January-June): 286,000 bpd

Share of observed exports (January-June): 11 per cent

Share of imports (December-May): 10 per cent

What government has said: South Korea is waiting for an official response from the US on whether its refiners can continue importing Iranian crude and condensate during the 180-day wind-down period, an official from the nation’s energy ministry said in early July. The country already put some imports on hold in June.

What companies have said: Refiners are substituting condensate from Iran with a processed fuel known as naphtha from elsewhere. SK Innovation Co., the Asian country’s top processor, Hanwha Total Petrochemical Co. and Hyundai Oilbank Co. all rushed to procure supply for July and August from other suppliers. Refiners didn’t buy supplies for July and will only decide whether to buy Iran’s South Pars condensate for the rest of the third quarter after negotiations between their government and the US administration.

JAPAN

Observed flows (January-June): 125,000 bpd

Share of observed exports (January-June): 5 per cent

Share of imports (December-May): 4 per cent

What government has said: Since the US pulled out of the Iran nuclear deal, Japan has sought a waiver from the US measures. Japan’s Finance Minister Taro Aso in June asked the US to give more clarity and reassurance to Japanese firms. Talks will continue, Japan’s foreign ministry said in early August.

What companies have said: Japan’s refining industry wants the government to “tenaciously hold talks” with the US to get a waiver on America’s renewed sanctions on Iran, Takashi Tsukioka, chairman of refiner Idemitsu and of the Petroleum Association of Japan, said last month. The executive sees it as “unreasonable” for Japan to be impacted in the same way as countries that have boosted Iranian oil imports. Japanese shipping companies and major banks, such as MUFG Bank and Mizuho Bank, have told oil distributors they may soon halt transactions with Iran.

Refiners were told that the banks won’t handle transactions for Iran-related deals that were signed on or after May 8, and that those signed before that period will be dealt with “on case-by-case basis”. Idemitsu declined to comment on what the company will do in response. Fuji Oil is considering halting crude imports from Iran earlier than it expected. The firm hasn’t determined a deadline yet and is still processing oil supplied under long-term contract. Cosmo Energy said it will likely halt Iranian crude imports after taking July-loading cargoes—if Japan doesn’t receive waiver, according to people with knowledge of the matter.

UNITED ARAB EMIRATES

Observed flows (January-June): 127,000 bpd

Share of observed exports (January-June): 5 per cent

What government has said: Not much. The U.A.E. has limited diplomatic relations with Iran, and withdrew its ambassador in Tehran in 2016. Abu Dhabi’s crown prince, the country’s de facto ruler, is a close US ally and supports efforts to curb Iran’s influence in the region. Dubai, the U.A.E.’s trade hub, does business with Iranian merchants and purchases condensate for its refineries. There were signs of flows from other countries rising in July at Iran’s expense.

What companies have said: Dubai-based Emirates National Oil Co. is trying alternatives to cargoes from the Islamic Republic, according to traders with knowledge of the matter.

EUROPEAN UNION

Observed flows (January-June): 516,000 bpd

Share of observed exports (January-June): 20 per cent

Share of imports (December-May): 5 per cent

What public authorities have said: The bloc is determined to preserve the Iran nuclear deal and considers that the consequences of abandoning it could be “catastrophic,” according to the EU foreign-policy chief Federica Mogherini. In June, she stressed that the most important challenge was to find solutions on banking and finance to support “legitimate trade and investment.” In July, the US rejected French, British and German demands to grant waivers or exemptions to companies seeking to do business in Iran.

What companies have said: The lack of clarity on the scale of the reductions sought by the Trump administration has left several customers continuing to buy Iranian crude, although some showed less interest in resuming business with Iran. Austria’s OMV AG has suspended investment projects in Iran, but still has made no decision on imports, CEO Rainer Seele said in an interview with Tass news agency. Swiss lender Banque de Commerce et de Placements SA told customers that it would stop financing Iranian oil cargoes by June 30, Reuters reported. Vitol Group’s chairman, Ian Taylor, said in May it will be near impossible to avoid the sanctions.

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